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A simple first step anyone can take towards a strong financial foundation is creating a monthly budget. One tool you can use is the 70/20/10 budget model. This model divides your income into three categories: 70% for living expenses, 20% for savings, and 10% for debt. Using this method will help build a savings plan into your life as a permanent habit and ensure you are paying off your debts in the process. Without a realistic budget in place, even individuals making six-figure salaries can easily spend their way into debt.
After your budget is set, it is important to establish an emergency fund. You will want to set aside at least six months of living expenses so that if an emergency occurs, you have funds to cover it. Building this account will take time, but it is important to pay yourself first and have funds accessible if you need them.
If you have a long-term savings goal in your sights, you will need to rely on the budget you create to make these happen. One financial myth I hear quite often is, “Investing is only for the wealthy.” Anyone with a small amount of savings can invest. Whether it’s in a short-term certificate account, long-term individual retirement account (IRA), or even in the stock market, there’s an option for everyone. Investing could give you the potential for higher returns than savings accounts, along with the ability to grow your wealth over time through compounding and reinvestment, and the opportunity to help you achieve long-term financial goals.
Another thing to strive for on your way to financial stability would be to build and maintain a strong credit score. The one way to build a strong credit score is to start small and stay consistent. Start with applying for a credit card. Use that credit card for something simple like gas or groceries. Then pay off the balance each month. This method will show that you are frequently using your line of credit while not accruing a large balance that creates debt.
Once you have built a strong credit score, your next task is to maintain it. One way to maintain a strong credit score is to increase your credit limit and credit access while maintaining a low credit balance. Meaning if your credit limit and access to credit increase, your monthly spending should remain the same. Remember, you do not want to charge more than 30% of your credit limit to a specific card because a large balance can start to negatively impact your score.
Building a successful financial foundation takes time. Start by tackling one goal at a time. Put some money towards student loans, some towards your long-term savings goals like buying a house, and make sure you save some for yourself. It is important to remember to enjoy life in the present, have money aside for vacations, shopping trips, or even emergencies. You never know what the future holds, but it is always good to start these smart savings habits now and continue to work towards a strong financial future.
